This blog is an attempt for me to archive my thoughts and actions on the market. I primarily focus on trading the S&P500 and Nasdaq100 indices using E-Mini futures. I will sometimes take small option positions on individual stocks if I anticipate a large move coming shortly.

Saturday, January 23, 2010

Well, after a brief consolidation, Friday's selling picked up and pushed the market down significantly. We very much have a subdividing wave 3 as expected, although I didn't expect 3 degrees of subdivision, but that appears to be what we have right now. While there is an outside chance that we had a wave 3 finish at Friday's open, a quick wave 4 and are experiencing a washout wave 5, the price action on the hourly chart does not support this view.

It looks like the base correction value in this wave is 10 pts. We've had three corrections of 8 (.786*10), 10, and 13 (1.382*10) pts. I'll be looking to see our wave 4s correlate to these values with a possible 20-21 pt correction coming in the last wave 4, possibly as a flat.

Are we done with the current micro wave 3? Certainly it is a possibility, but I'll let the market will lead the way. For quick trades I'll be looking at entry points at the 8 SMA on the 15 min chart, especially if we've already come at least 8 pts off of the low.

As exciting as it is to see a resumption of the primary trend, our really big money opportunity will come during the wave 2 and subsequent wave 3. I've already cashed in lots of my options that I bought earlier in the week for 100%+ gains. For the ones that I will buy during wave 2, I'll be looking for 3-5x that amount for a profit target as the VIX sky rockets (increasing the volatility premium) and out-of-the-money puts become in-the-money. In anticipating big moves I will likely be looking at FAZ and QID calls as those gains can really compound quickly when the market is impulsing in your direction.

Remember that wave 3s are so powerful because it is an alignment of price and fundamentals as the market all of sudden comes to the realization that current price is not in alignment with the fundamentals. Unfortunately the fundamentals have only gotten worse over the past 2 years. Bank leverage is still at dangerously high levels (when considering mark-to-fantasy accounting and off-balance sheet liabilities), the gov't debt has gone through the roof, the people will not stand for any more bank bailouts as executives continue to enrich themselves at taxpayer expense, the fed has already has interest rates at 0% and IS the market for purchasing fannie mae/freddie mac MBS, all while unemployment is at best stabilizing at a long-term rate of 10%.

The bright side of this of course is that our country needs a wake up call. Greed has taken over in all aspects of our country. A bear market in greed is what this country needs to become once again great.

Well, after a brief consolidation, Friday's selling picked up and pushed the market down significantly. We very much have a subdividing wave 3 as expected, although I didn't expect 3 degrees of subdivision, but that appears to be what we have right now. While there is an outside chance that we had a wave 3 finish at Friday's open, a quick wave 4 and are experiencing a washout wave 5, the price action on the hourly chart does not support this view.

It looks like the base correction value in this wave is 10 pts. We've had three corrections of 8 (.786*10), 10, and 13 (1.382*10) pts. I'll be looking to see our wave 4s correlate to these values with a possible 20-21 pt correction coming in the last wave 4, possibly as a flat.

Are we done with the current micro wave 3? Certainly it is a possibility, but I'll let the market will lead the way. For quick trades I'll be looking at entry points at the 8 SMA on the 15 min chart, especially if we've already come at least 8 pts off of the low.

As exciting as it is to see a resumption of the primary trend, our really big money opportunity will come during the wave 2 and subsequent wave 3. I've already cashed in lots of my options that I bought earlier in the week for 100%+ gains. For the ones that I will buy during wave 2, I'll be looking for 3-5x that amount for a profit target as the VIX sky rockets (increasing the volatility premium) and out-of-the-money puts become in-the-money. In anticipating big moves I will likely be looking at FAZ and QID calls as those gains can really compound quickly when the market is impulsing in your direction.

Remember that wave 3s are so powerful because it is an alignment of price and fundamentals as the market all of sudden comes to the realization that current price is not in alignment with the fundamentals. Unfortunately the fundamentals have only gotten worse over the past 2 years. Bank leverage is still at dangerously high levels (when considering mark-to-fantasy accounting and off-balance sheet liabilities), the gov't debt has gone through the roof, the people will not stand for any more bank bailouts as executives continue to enrich themselves at taxpayer expense, the fed has already has interest rates at 0% and IS the market for purchasing fannie mae/freddie mac MBS, all while unemployment is at best stabilizing at a long-term rate of 10%.

The bright side of this of course is that our country needs a wake up call. Greed has taken over in all aspects of our country. A bear market in greed is what this country needs to become once again great.

The Really Big Picture

Where we are in the grand scheme of things

My Trading Portfolio Performance

Well, I finally went through the numbers for 2009. To put it midly I had the results one would expect when you try and short one of the biggest bull runs in history in terms of % gains over a 9+ month run nearly straight up. My big losses came from 3 areas:

March 2009 - I was up substantially and didn't honor my stop loss as I was expecting a retest of the lows and even added to my short position in that expectation. You know what happened: no retest.

June 2009 - I was nearly perfect in my entry on this short position but my profit target of 38.2% retracement never got close as the market gave the great head & shoulders break fake and reversed hard.

September 2009 - October 2009: The market gave a consistent head fake during each of these months with sharp sell offs that were completely retraced.

In the end I wiped out all my gains from 2008 and am back in the hole. Lessons learned: you can anticipate market action all you want but it is safer to enter on price confirmation than using the freight train method (stand in front and pray you don't get run over!). We'll see what 2010 brings, but I'm confident that with patience I'll get it back again, but this next time I don't plan on losing it again ;-). Best of Luck!

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The results for 2008 are in and my final #s were 163.6% return. That is actually a big disappointment for me since December decimated my annual returns. I was closer to 300% at one point in December. May 2009 be a better trading year for everyone!

My Wave Count from 2007

Long-Term Market View

I am a firm believer that the market completed, in Elliott terms, a Grand Supercycle at the end of 2000 or 2007 depending on the count, but it matters little as they both had near the same nominal price and eventual wealth destruction will be just as great.

As the US economy has been built up on a massive credit boom over the last few decades, this grand supercycle correction will be deflationary in nature and will destroy more wealth than the great depression (which was a supercycle correction). But since the bear market that began in 1929 was also deflationary, I think it is still a good model to work from.

Here's an interesting chart showing the'29 Bear Market. I currently believe we are nearing the end of point 6 on that chart. Point 7 will probably top out around SPX 1050 and that should be everyone's exit point from the market if they are conservative (i.e. retirement accounts).

Followers

About Me

I've been playing in the market for about 5-6 years now, and became very active in 2006. In 2007 I pretty much wiped out my account (>90% lost) on a major option play that didn't go my way. In 2008 I was given the opportunity to spend FT on my trading art with a nice severance package from my employer when my position was eliminated. In 2008 I was able to completely re-coup my '07 losses and bank some nice gains using front month options, following the trend, and a more disciplined approach. Now I've moved onto E-Mini Futures to hopefully improve my trading even more, reduce my commissions, and produce even more gains in 2009.